Why the Yankees Must Keep Spending

By Brian Costa

When the Yankees announced their $85 million signing of catcher Brian McCann earlier this week, owner Hal Steinbrenner cited the team’s “singular and unwavering desire” to play deep into October. That desire likely will be mentioned again when the Yankees announce their seven-year, $153 million deal with ex-Red Sox outfielder Jacoby Ellsbury in the coming days.

But a look at the Yankees’ finances reveals that a lust for trophies isn’t the only thing fueling this free-agent splurge. When the Yankees fail to make the playoffs, as they did in 2013, their revenues plummet.

Proceeds from ticket sales and stadium suite licenses alone totaled $295 million through Sept. 30 this year, according to public records reviewed by The Wall Street Journal. That is down from $353 million in 2012, $377 million in 2011 and $384 million in 2010, the records show.

The figures appeared on financial statements the Yankees are required to file with the city to demonstrate their ability to make payments on the bonds used in the construction of Yankee Stadium. Attendance represents just one of the Yankees’ revenue streams, but it highlights the enormity of the financial incentives for the team to make the playoffs.

People with knowledge of the team’s finances said the drop-off from 2012 is almost entirely a result of the fact that they missed the playoffs for the first time since 2008.

Had the Yankees failed to reach the playoffs in 2012, their ticket and suite revenues would have been closer to $300 million rather than $353 million, the people said. Similarly, in 2010 and 2011, postseason games accounted for $59 million and $58 million of all such revenues, respectively.

In other words, a Yankees team that wins 93 games and makes the playoffs brings in about 15% more ticket and suite revenue than a Yankees team that wins 88 games and misses the playoffs. And that is to say nothing of the boost in merchandise and concession sales and next-year ticket sales.

“What this clearly shows is that the Yankees’ whole financial equation is built around winning,” said Vince Gennaro, author of “Diamond Dollars: The Economics of Winning in Baseball” and a consultant to major-league teams. “If you take that away, they become mere mortals from a financial standpoint.”

Whether the additions of McCann and Ellsbury, whose deal was still being completed Wednesday, will be enough to get back to October remains to be seen. They remain in talks with Robinson Cano, and they need to shore up their pitching.

But the Yankees were an old and injury-battered team in 2013 and still managed to win 85 games. According to FanGraphs, Ellsbury and McCann had a combined value of 8.5 wins more than the expected value of a Triple-A fill-in this year. If Cano returns and CC Sabathia and Mark Teixeira have bounce-back seasons, it could add up to a return to the playoffs.

If that happens, lavishing a combined $238 million on Ellsbury and McCann and perhaps $170 million or more on Cano will be well worth it.

“The financial payoff at this juncture, coming off a missed postseason, is way more than any other team stands to gain by improving themselves by three, four, five, six wins—whatever the number might be,” Gennaro said. “Some people will say, ‘Well, is it an overpay?’ With the Yankees, that’s the wrong question. The second-biggest problem the Yankees could have is overpaying for a free agent. The biggest problem is not getting the free agent they need to get back to the postseason and make a deep run into it.”

If all had gone to plan, the Yankees wouldn’t have needed to spend much on free agents at all. Steinbrenner believes the team shouldn’t require an exorbitant payroll to win championships. And he is right: A better farm system would make such an outlay less of a necessity.

But the Yankees’ farm system took a step backward in 2013. There are no top prospects primed to reinvigorate the franchise. And so they faced a choice: Remain conservative, don’t bet too much on 2014 and adopt a more patient, long-term mind-set. Or go out and do whatever it takes to assemble a legitimate contender for 2014.

Door No. 1 would have made it easier to bring the payroll under the $189 million luxury tax threshold in 2014. But the Yankees still believe they can do so, even with McCann, Ellsbury, Cano and perhaps a free-agent starting pitcher on board.

And if they don’t? Their bottom line will take a hit. But considering how much their revenues plunge when they miss the playoffs, it beats the alternative.

“I know there’s people out there who have said, ‘Well, the Yankees just have this money machine that just keeps printing money,’” Gennaro said. “Let me tell you: If the Yankees were an 85-win team or an 83-win team for three or four years in a row, they would suffer financially orders of magnitude more than any other franchise.”